Jim Cramer says one of SpaceX’s biggest risks is this group of investors
One of the biggest risks facing the upcoming SpaceX IPO isn’t a lack of demand, it’s the possibility that too many investors will chase quick profits, CNBC’s Jim Cramer said Wednesday.
“The speculators haven’t been there long. They might not even be there in the afternoon,” the “Mad Money” host said. “This group worries me.”
Elon Musk’s rocket company is reportedly four times oversubscribed; This means that demand from investors is roughly four times greater than the number of shares on offer. While that usually indicates strong interest, Cramer said the makeup of the buyer base may be more important than the headline demand figure.
His concern is that some investors treat the IPO as a short-term trade rather than a long-term investment. If shareholders rush to sell after the shares begin trading, this could create volatility and put pressure on the shares.
“These people can hurt you,” Cramer said. “They are not your friends because they just want to turn this situation around as soon as possible.”
Instead, Cramer said the healthiest IPOs tend to attract investors willing to hold shares for years.
“What you want is a deal where the only buyers are retail investors who don’t touch it or maybe buy more after the open, combined with large institutions that come into it too early and don’t want to sell because they promised not to sell,” he said.
Cramer added that tightly allocated quotes can help reduce the impact of short-term investors. In his view, investors should expect to receive fewer shares than they actually requested because this indicates that demand is outstripping supply.
“If you own 100 shares and only buy 25, you know you’re in good shape,” he said. “It makes everyone hungry to buy more.”
Stating that SpaceX’s oversubscription will help limit the influence of speculators, Cramer said that he would feel more comfortable if the demand was even stronger.
“Given that this deal is four times oversubscribed, this shouldn’t happen,” he said. “But in reality, I admit I would feel a lot better if SpaceX had ten times as many subscribers.”
